<PAGE>
- --------------------------------------------------------------------------------
ANNUAL REPORT AND PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
[logo]
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
- -------------------------------------------------------------------------------
New England
High Income Fund
[graphic omitted]
- -----------------
DECEMBER 31, 1996
- -----------------
<PAGE>
FEBRUARY 1997
- -------------------------------------------------------------------------------
Dear New England Funds Shareholder,
[Photo Henry L.P. Schmelzer]
Taken together, 1995 and 1996 constituted the sixth strongest back-to-back years
for the U.S. stock market since 1915, as measured by percentage gain in the Dow
Jones Industrial Average (according to Bloomberg Business News).
Most New England Funds portfolio managers believe that the forces behind this
rally -- low inflation, relatively stable interest rates and strong corporate
profits -- will persist, at least for a time. Nevertheless, bull markets can
suddenly turn quiet; they can decline modestly; or they can reverse course
sharply. No one can predict what is ahead, nor can anyone guarantee whether the
market's strength will extend even further in 1997 and beyond.
Maintain a Long-Term Perspective
Whatever the market's direction, you should be prepared to consider any
short-term trends in the broader context of your long-term personal goals,
including the accumulation of financial assets. One way to manage this important
process is by diversifying your investments. While U.S. stocks have historically
been the strongest performers, you may, depending on your financial goals and
needs, also benefit from investing in various types of bond funds, and by
participating in growing overseas markets.
Remember that each investment has its own unique risks. What's more, no strategy
can assure a profit or protect against a loss. However, one time-tested approach
is to invest regularly and stay invested -- in good times and bad -- to avoid
the pitfall of guessing what the market might do in the short run.
Our Multiple-Adviser Approach Sets Us Apart
Many financial representatives recommend New England Funds to their clients
because of our distinctive multiple-adviser approach. For each fund, we
hand-pick a specific subadviser or subadvisers with significant experience and
demonstrated skill in selecting investments that are in tune with that fund's
stated objective. We call it matching the talent to the task.
Finally, it may interest you to learn that you are part of a major national
trend. In 1996, nearly 37 million U.S. households owned mutual funds, according
to the Investment Company Institute, an industry trade organization. Mutual
funds are now a cornerstone of retirement, college and other investment plans
for millions of Americans.
New England Funds has grown with the industry and is now over $6 billion in
size. We thank you for helping us reach this important milestone, and look
forward to serving your investment needs well into the future.
Sincerely,
/s/ Henry L.P. Schmelzer
Henry L.P. Schmelzer, President
For more information, including a prospectus for any New England Fund, please
contact your financial representative or call the Investor Services and
Marketing Group at 800-225-5478. Please read the prospectus carefully, including
the information on charges and expenses, before you invest.
<PAGE>
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NEW ENGLAND HIGH INCOME FUND
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AWARD WINNING SERVICE -- TWO YEARS RUNNING
- -------------------------------------------------------------------------------
- --------------------- For two years running we're proud to announce that
[Logo] DALBAR, an independent evaluator of mutual fund
QUALITY service, has awarded New England Funds its Quality
TESTED SERVICE Tested Service Seal for "providing the highest
1996 tier of service excellence in the mutual fund
- --------------------- industry." New England Funds is one of just three
DALBAR mutual fund companies to earn this distinction in
HONORS COMMITMENT TO: each of the last two years -- another reason why
INVESTORS we are becoming known as the mutual fund company
- --------------------- Where The Best Minds Meet(TM).
INVESTMENT RESULTS THROUGH DECEMBER 31, 1996
- -------------------------------------------------------------------------------
Putting Performance into Perspective The graph comparing
your Fund's performance to a benchmark index provides
you with a general sense of how your Fund performed. To
put this information in context, it may be helpful to
understand the special differences between the two. Your
Fund's total return for the period shown appears with
and without sales charges and includes Fund expenses and
management fees. A securities index measures the
performance of a theoretical portfolio. Unlike a fund,
the index is unmanaged; there are no expenses that
affect the results. In addition, few investors could
purchase all of the securities necessary to match the
index. And, if they could, they would incur transaction
costs and other expenses.
<PAGE>
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NEW ENGLAND HIGH INCOME FUND
- -------------------------------------------------------------------------------
[A chart in the form of a line graph appears here illustrating the growth of a
$10,000 investment in Class A Shares of New England High Income Fund compared to
the First Boston High Yield Index and the Cost of Living from 12/31/86.
The data points to this chart are as follows:]
- -------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES
- -------------------------------------------------------------------------------
DECEMBER 1985 THROUGH DECEMBER 1996
COMPARED TO FIRST BOSTON HIGH YIELD INDEX(4) AND THE COST OF LIVING(5)
WITH MAXIMUM FIRST BOSTON COST OF
NAV(1) SALES CHARGE(2) HIGH YIELD(4) LIVING
- -------------------------------------------------------------------------------
12/31/86 $10,000 $ 9,550 $10,000 $10,000
1987 $ 9,853 $ 9,410 $10,653 $10,443
1988 $10,107 $ 9,652 $11,871 $10,905
1989 $10,442 $ 9,972 $11,917 $11,412
1990 $ 9,061 $ 8,654 $11,157 $12,109
1991 $12,366 $11,810 $16,038 $12,479
1992 $14,316 $13,672 $18,710 $12,841
1993 $16,680 $15,929 $22,248 $13,194
1994 $16,128 $15,402 $22,032 $13,548
1995 $18,027 $17,216 $25,863 $13,902
1996 $20,712 $19,780 $29,075 $14,363
This illustration represents past performance of Class A shares and cannot
predict future results. Investment return and principal value may vary,
resulting in a gain or loss on the sale of shares. Class B share performance
will be greater or less than that shown based on differences in inception date,
fees and sales charges. All index and Fund performance assumes reinvested
distributions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CREDIT QUALITY COMPOSITION -- 12/31/96
- -------------------------------------------------------------------------------
AAA 0.9%
B 77.5%
BB 11.6%
CCC 10.0%
Portfolio holdings and asset allocations may change.
- -------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND HIGH INCOME FUND
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS -- 12/31/96
- -------------------------------------------------------------------------------
CLASS A (Inception 2/22/84) 1 YEAR 5 YEARS 10 YEARS
Net Asset Value(1) 14.89% 10.87% 7.55%
With Max. Sales Charge(2) 9.76 9.84 7.06
Lipper High Yield Average(6) 13.67 12.15 9.46
CLASS B (Inception 9/20/93) 1 YEAR 3 YEARS SINCE INCEPTION
Net Asset Value(1) 14.12% 6.79% 7.58%
With CDSC(3) 10.12 5.96 7.09
First Boston High Yield(4) 12.42 9.33 10.03
Lipper High Yield Average(6) 13.67 8.33 n/a
These returns represent past performance. Investment return and principal value
will fluctuate so that shares, upon redemption, may be worth more or less than
original cost. The Fund's current subadviser began managing the Fund on July 1,
1996. Results for earlier periods reflect performance under previous advisers
and subadvisers.
NOTES TO CHARTS AND PERFORMANCE UPDATE
(1) Net Asset Value (NAV) performance assumes reinvestment of all distributions
and does not reflect the payment of a sales charge at the time of purchase.
(2) With Maximum Sales Charge assumes reinvestment of all distributions and
reflects the maximum sales charge of 4.5% at the time of purchase of Class A
shares.
(3) With Contingent Deferred Sales Charge (CDSC) performance assumes a maximum
4% sales charge is applied to a redemption of Class B shares. The sales
charge will decrease over time, declining to zero five years after the
purchase of shares.
(4) First Boston High Yield Index is an unmanaged index of bonds issued by U.S.
corporations rated below investment-grade by Standard & Poor's or Moody's
Investors Service. The Index performance has not been adjusted for ongoing
management, distribution and operating expenses and sales charges applicable
to mutual fund investments.
(5) Cost of Living is based on the Consumer Price Index, a widely recognized
measure of the cost of goods and services in the United States, calculated
by the U.S. Bureau of Labor Statistics.
(6) Lipper Average is an average of the total return performance (calculated on
the basis of net asset value) of funds with similar investment objectives as
calculated by Lipper Analytical Services, an independent mutual fund ranking
service.
<PAGE>
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NEW ENGLAND HIGH INCOME FUND
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QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGERS
- -------------------------------------------------------------------------------
Q. How would you characterize the investment environment for New England High
Income Fund in 1996?
[Photo of Gary L. Goodenough & Madeline Einhorn Glick
Loomis Sayles & Company, L.P.]
It was a mixed year for bonds during which high-yield bonds stood out. In
fact, the high-yield bond market was a top-performing U.S. fixed-income
sector. The sector's strong performance even captured the attention of
nontraditional high-yield investors, such as individuals and money managers
who typically prefer higher-quality bonds. These investors sought higher
yields and greater potential for capital appreciation than higher-quality
bonds could provide. In our opinion, the consistent level of investor
interest suggests that high-yield bonds have gained acceptance as a distinct
group within the fixed-income asset class.
The economic and interest rate environment changed several times during the
year. Concerns about robust economic growth and future inflation created
volatility in the general fixed-income markets early in 1996. By mid-year,
long-term interest rates had stabilized as reports confirmed the economy's
moderate growth and manageable inflation levels. While high-yield bond
prices are less sensitive to changes in interest rates than those of higher
quality issues, bonds across the quality spectrum benefited from stable
interest rates.
Q. How did the Fund perform against this backdrop?
New England High Income Fund provided a total return on net asset value
(NAV) of 14.89% on Class A shares for the 12-month period ended December 31,
1996. This return reflects an increase in share price to $9.42 on December
31, 1996, from $8.98 a year ago and reinvested distributions totaling $0.83
per share. By comparison, the Fund's benchmark -- the First Boston High
Yield Index -- posted a 12.42% total return for the same period, while its
peer group of High Yield Bond funds (followed by Lipper Analytical Services)
lagged with an average return of 13.67%. During the year, the Fund increased
its monthly dividend distribution to $0.07 per share from $.0675.
Q. What strategies did you employ during the past year?
We took steps to shape a more concentrated, flexible portfolio when we
assumed responsibility for the Fund in July. In essence, we identify bonds
that, in our opinion, offer both high yields and potential for capital
appreciation. As the credit quality of these undervalued securities
improves, their high yields and price appreciation combine to generate
attractive total returns.
Using this bond selection process, we reduced the number of holdings in the
portfolio to focus better on those bonds that we believed offered the
greatest opportunity for attractive performance over time. At the end of the
period, the Fund held 38 issues, down from 133 on June 30, 1996.
Q. Did any of the Fund's holdings play a key role in its performance?
Several holdings contributed significantly to Fund performance. The world's
largest Spanish language media company -- Grupo Televisa -- for example, has
generated a 21% total return since its purchase in July. Grand Union, a
supermarket chain, was up approximately 16% from its purchase price.
Investments in AMF bonds, issued by the major bowling equipment manufacturer
and operator, rose approximately 12% during the last six months.
Q. What is your outlook for the Fund during the coming months?
Our outlook is positive, provided that the economy maintains its current
pattern of reasonable growth and low inflation. Continued strong demand from
traditional and nontraditional high-yield investors will keep the
supply/demand balance tilted favorably toward higher prices. Meanwhile, we
will continue to emphasize intensive credit analysis as we work to provide
shareholders with high yields from bonds selling at undervalued prices.
<PAGE>
<TABLE>
<CAPTION>
BONDS AND NOTES--90.1% OF TOTAL NET ASSETS
FACE
AMOUNT DESCRIPTION VALUE (a)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
AUTOMOTIVE & RELATED--5.9%
$ 1,000,000 American General Corp., 12.875%, 5/1/02 .................. $ 945,000
1,000,000 CSK Auto, Inc., 11.000%, 11/1/06 ......................... 1,032,500
1,500,000 Delco Remy International, Inc., 144A, 10.625%, 8/1/06 (e).. 1,584,375
-----------
3,561,875
-----------
AVIATION/PARTS & SERVICES--3.5%
1,900,000 Airplane Pass Through Trust, 10.875%, 3/15/19 ............ 2,095,833
-----------
BROADCASTING--8.8%
2,000,000 All American Communications, Inc., 10.875%, 10/15/01 ..... 2,025,000
1,750,000 FrontierVision Oper Partners L.P., 11.000%, 10/15/06 ...... 1,758,750
1,500,000 Lenfest Communications Inc., 144A, 10.500%, 6/15/06 (e) . 1,575,000
-----------
5,358,750
-----------
COMPUTERS--1.8%
1,000,000 Advanced Micro Devices, Inc., 11.000%, 8/1/03 ............ 1,085,000
-----------
ENERGY--3.1%
1,750,000 Transtexas Gas Corp., 11.500%, 6/15/02 ................... 1,890,000
-----------
ENTERTAINMENT--3.5%
3,250,000 AMF Group, Inc., 12.250%, 3/15/06 ........................ 2,149,063
-----------
FOOD - RETAILERS/WHOLESALERS--16.0%
2,000,000 Big V Supermarkets, Inc., 11.000%, 2/15/04 ............... 1,850,000
2,100,000 Flagstar Corp., 10.750%, 9/15/01 ......................... 1,900,500
2,000,000 Grand Union Co., 12.000%, 9/1/04 ......................... 2,110,000
3,500,000 Penn Traffic Co., 9.625%, 4/15/05 ........................ 1,986,250
1,750,000 Ralphs Grocery Co., 13.750%, 6/15/05 ..................... 1,855,000
-----------
9,701,750
-----------
FOREIGN ISSUES--8.7%
3,500,000 Groupo Televisa S.A. de CV, 0/13.250% 5/15/08 (d) ........ 2,327,500
3,000,000 Kabelmedia Holding GMBH, 0/13.625% 8/1/06 (d) ............ 1,665,000
1,250,000 Mexico United Mexican States, 0/11.375% 9/15/16 (d) ...... 1,310,938
-----------
5,303,438
-----------
HOME BUILDERS--3.3%
2,000,000 Hovnanian K Enterprises, Inc., 11.250%, 4/15/02 .......... 2,027,500
-----------
INDUSTRIALS--10.1%
$2,500,000 Envirotest Systems Corp., 9.625%, 4/1/03 ................. 2,050,000
800,000 Fairfield Manufacturing, 11.375%, 7/1/01 ................. 836,000
1,000,000 Motors & Gears, Inc., 10.750%, 11/15/06 .................. 1,032,500
1,000,000 Primeco, Inc., 12.750%, 3/1/05 ........................... 1,142,500
1,000,000 Terex Corp., 13.250%, 5/15/02 ............................ 1,085,000
-----------
6,146,000
-----------
MACHINERY--2.1%
1,750,000 Bell & Howell Co., 0/11.500% 3/1/05 (d) .................. 1,268,750
-----------
METAL--16.5%
2,000,000 Acme Metals, Inc., 12.500%, 8/1/02 ....................... 2,170,000
750,000 Algoma Steel, Inc., 12.375%, 7/15/05 ..................... 810,000
1,750,000 Envirosource, Inc., 9.750%, 6/15/03 ...................... 1,629,687
1,500,000 Euramax International PLC, 144A, 11.250%, 10/1/06 (e) ... 1,556,250
1,750,000 GS Technologies oper, Inc., 12.250%, 10/1/05 ............. 1,837,500
2,000,000 Weirton Steel Corp., 11.375%, 7/1/04 ..................... 2,030,000
-----------
10,033,437
-----------
PAPER--3.0%
1,750,000 Stone Container Finance Co., 144A, 11.500%, 8/15/06 (e) . 1,802,500
-----------
RAILROADS & EQUIPMENT--2.4%
1,500,000 Johnstown America Industries, Inc., 11.750%, 8/15/05 ..... 1,432,500
-----------
RETAIL--1.4%
1,000,000 Finlay Enterprises, 0/12.000% 5/1/05 (d) ................. 870,000
-----------
Total Bonds and Notes (Identified Cost $53,343,209) ........ 54,726,396
-----------
COMMON STOCK--1.0%
SHARES
- ---------------------------------------------------------------------------------------------------
70,000 Abacan Resources Corp. .................................... 608,125
7,500 Specialty Foods Acquisition Corp. (c) ...................... 1,875
-----------
610,000
-----------
Total Common Stock (Identified Cost $585,763) ............. 610,000
-----------
PREFERRED STOCK--6.1%
- ---------------------------------------------------------------------------------------------------
17,500 Ameriking, Inc.13.000%, 12/01/08 (pay-in-kind) ............. 1,925,000
20,000 Cablevision Systems Corp. 11.125%, 4/01/08 (pay-in-kind) ... 1,795,000
-----------
3,720,000
-----------
Total Preferred Stock (Identified Cost $3,621,250) ........ 3,720,000
-----------
SHORT TERM INVESTMENTS--2.4%
FACE
AMOUNT DESCRIPTION VALUE (a)
- ---------------------------------------------------------------------------------------------------
$1,471,000 Repurchase agreement with State Street Bank & Trust Co.
dated 12/31/96 at 4.750% to be repurchased at $1,471,388
on 1/02/97, collateralized by $1,175,000 U.S. Treasury
Bonds 8.875% due 8/15/17 valued at $1,505,837 ........... $ 1,471,000
-----------
Total Short Term Investments (Identified Cost $1,471,000) . 1,471,000
-----------
Total Investments--99.6% (Identified Cost $59,021,222) (b) . 60,527,396
Other assets less liabilities ............................. 231,558
-----------
Total Net Assets--100% ..................................... $60,758,954
===========
(a) See Note 1a to the financial statements.
(b) Federal Tax Information: At December 31, 1996 the net unrealized appreciation
on investments based on cost for federal income tax purposes of $58,998,908
was as follows:
Aggregate gross unrealized appreciation for all investments in which there is
an excess value over tax cost ............................................. $ 2,038,238
Aggregate gross unrealized depreciation for all investments in which there is
an excess of tax cost over value .......................................... (509,750)
-----------
Net unrealized appreciation ................................................. $ 1,528,488
===========
As of December 31, 1996 the fund has a net tax basis capital loss
carryforward as follows:
Expiring December 31, 1997 .................................................. $ 1,341,040
December 31, 1998 .................................................. $ 527,465
December 31, 1999 .................................................. $ 1,300,610
December 31, 2004 .................................................. $ 852,055
(c) Non-income producing security.
(d) Debt obligation initially issued in zero coupon form which converts to coupon
form at a specified rate and date.
(e) Securities exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- -------------------------------------------------------------------------------
December 31, 1996
<TABLE>
<S> <C> <C>
ASSETS
Investments at value ..................................... $60,527,396
Cash ..................................................... 817
Receivable for:
Fund shares sold ....................................... 272,880
Securities sold ........................................ 33,140
Dividends and interest ................................. 1,358,485
Prepaid registration expense ............................. 4,000
-----------
62,196,718
LIABILITIES
Payable for:
Securities purchased ................................... $1,033,617
Fund shares redeemed ................................... 123,229
Dividends declared ..................................... 135,579
Miscellaneous .......................................... 1,625
Accrued expenses:
Management fees ........................................ 81,354
Deferred trustees' fees ................................ 3,590
Accounting and administrative .......................... 1,833
Other expenses ......................................... 56,937
----------
1,437,764
-----------
NET ASSETS ................................................. $60,758,954
===========
Net Assets consist of:
Capital paid in ........................................ $65,027,904
Undistributed net investment income .................... 27,363
Accumulated net realized losses ........................ (5,802,487)
Unrealized appreciation on investments ................. 1,506,174
-----------
NET ASSETS ................................................. $60,758,954
===========
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($42,991,571 divided by 4,563,836 shares of beneficial
interest) .............................................. $9.42
=====
Offering price per share (100/95.50 of $9.42) ............ $9.86*
=====
Net asset value and offering price of Class B shares
($17,767,383 divided by 1,886,374 shares of beneficial
interest) .............................................. $9.42**
=====
Identified cost of investments ........................... $59,021,222
===========
* Based upon single purchases of less than $100,000.
Reduced sales charges apply for purchases in excess of this amount.
**Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
</TABLE>
See accompanying notes to finanial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
Year Ended December 31, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends ................................................ $ 38,702
Interest ................................................. 5,563,961
-----------
5,602,663
Expenses
Management fees ........................................ $ 383,464
Service and distribution fees - Class A ................ 118,046
Service and distribution fees - Class B ................ 134,657
Trustees' fees and expenses ............................ 12,284
Accounting and administrative .......................... 21,859
Custodian .............................................. 63,868
Transfer agent ......................................... 93,559
Audit and tax services ................................. 28,500
Legal .................................................. 43,623
Printing ............................................... 38,751
Registration ........................................... 21,891
Miscellaneous .......................................... 8,966
------------
Total Expenses ........................................... 969,468
Less expenses waived by the investment adviser and
subadviser ............................................. (82,286) 887,182
------------ -----------
Net investment income .................................... 4,715,481
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized loss on:
Investments - net ...................................... (2,633,373)
Unrealized appreciation on:
Investments - net ...................................... 5,306,434
------------
Net gain on investment transactions ...................... 2,673,061
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS ................. $ 7,388,542
===========
</TABLE>
See accompanying notes to finanial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
----------- -----------
<S> <C> <C>
FROM OPERATIONS
Net investment income ...................................... $ 4,373,660 $ 4,715,481
Net realized gain (loss) on investments .................... 357,087 (2,633,373)
Unrealized appreciation on investments ..................... 165,613 5,306,434
----------- -----------
Increase in net assets from operations ..................... 4,896,360 7,388,542
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A .................................................. (3,631,062) (3,593,146)
Class B .................................................. (742,598) (1,122,335)
In excess of net investment income
Class A .................................................. (172,611) (24,269)
Class B .................................................. (42,339) (14,568)
----------- -----------
(4,588,610) (4,754,318)
----------- -----------
Increase in net assets derived from capital share
transactions ............................................... 10,559,256 8,351,656
----------- -----------
Total increase in net assets ............................... 10,867,006 10,985,880
NET ASSETS
Beginning of the year ...................................... 38,906,068 49,773,074
----------- -----------
End of the year ............................................ $49,773,074 $60,758,954
=========== ===========
UNDISTRIBUTED (DISTRIBUTIONS IN EXCESS OF) NET INVESTMENT INCOME
Beginning of the year ...................................... $ 101,090 $ (44,018)
=========== ===========
End of the year ............................................ $ (44,018) $ 27,363
=========== ===========
</TABLE>
See accompanying notes to finanial statements.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year .... $ 9.07 $ 9.46 $10.06 $ 8.89 $ 8.98
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ................. 0.94 0.90 0.88 0.88 0.84
Net Realized and Unrealized Gain (Loss)
on Investments ...................... 0.44 0.61 (1.19) 0.13 0.44
------ ------ ------ ------ ------
Total From Investment Operations ...... 1.38 1.51 (0.31) 1.01 1.28
------ ------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income .. (0.94) (0.90) (0.86) (0.88) (0.83)
Distributions in Excess of Net
Investment Income ................... 0.00 (0.01) 0.00 (0.04) (0.01)
Distributions From Paid-in Capital .... (0.05) 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------
Total Distributions ................... (0.99) (0.91) (0.86) (0.92) (0.84)
------ ------ ------ ------ ------
Net Asset Value, End of Year .......... $ 9.46 $10.06 $ 8.89 $ 8.98 $ 9.42
====== ====== ====== ====== ======
Total Return (%)(b) ................... 15.8 16.5 (3.3) 11.8 14.9
Ratio of Operating Expenses to
Average Net Assets (%)(a) ........... 1.50 1.54 1.60 1.60 1.53
Ratio of Net Investment Income to
Average Net Assets (%) .............. 9.74 9.17 9.18 9.71 9.32
Portfolio Turnover Rate (%) ........... 19 43 33 30 134
Net Assets, End of Year (000) ......... $20,992 $31,176 $33,673 $39,148 $42,992
(a) Effective July 1, 1996 expenses were voluntarily limited to 1.40% of Class A average net assets. Prior to that
effective October 1, 1993 expenses were voluntarily limited to 1.60% of Class A average net assets. See Note 4.
From May 18, 1989 through September 30, 1993 expenses were voluntarily limited to 1.50% of average net assets.
The ratios of operating expenses to average net assets, assuming the foregoing expense limitations had not been
in effect, would have been 2.63%, 2.00%, 1.83% and 1.72% for the years ended December 31, 1992, 1993, 1994, and
1995 respectively and 1.69% for the year ended December 31, 1996.
(b) A sales charge is not reflected in total return calculations. As of January 1, 1993 the fund discontinued the use
of equalization accounting.
</TABLE>
See accompanying notes to finanial statements.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- -------------------------------------------------------------------------------
[CAPTION]
<TABLE>
CLASS B
-------------------------------------------------------------
SEPTEMBER 20(a)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------------------------
1993 1994 1995 1996
------------------- ------ ------ ------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ...... $ 9.87 $10.06 $ 8.88 $ 8.98
------ ------ ------ ------
Income From Investment Operations
Net Investment Income ..................... 0.23 0.79 0.83 0.79
Net Realized and Unrealized Gain (Loss) on
Investments ............................. 0.20 (1.18) 0.13 0.42
------ ------ ------ ------
Total From Investment Operations .......... 0.43 (0.39) 0.96 1.21
------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income ...... (0.23) (0.78) (0.81) (0.76)
Distributions in Excess of Net Investment
Income .................................. (0.01) (0.01) (0.05) (0.01)
------ ------ ------ ------
Total Distributions ....................... (0.24) (0.79) (0.86) (0.77)
------ ------ ------ ------
Net Asset Value, End of Period ............ $10.06 $ 8.88 $ 8.98 $ 9.42
====== ====== ====== ======
Total Return (%)(c) ....................... 4.4 (4.0) 11.2 14.1
Ratio of Operating Expenses to
Average Net Assets (%)(b) ............... 2.25(d) 2.25 2.25 2.19
Ratio of Net Investment Income to
Average Net Assets (%) .................. 7.66(d) 8.53 8.96 8.33
Portfolio Turnover Rate (%) ............... 43(d) 33 30 134
Net Assets, End of Period (000) ........... $1,232 $5,233 $10,625 $17,767
(a) Commencement of operations.
(b) Effective July 1, 1996 expenses were voluntarily limited to 2.15% of Class B average net
assets. Prior to that effective October 1, 1993 expenses were voluntarily limited to 2.25%
of Class B average net assets. See Note 4.
The ratios of operating expenses to average net assets, assuming the foregoing expense
limitations had not been in effect for Class B shares, would have been 2.53% for the
period ended December 31, 1993, 2.48% for the year ended December 31, 1994 and 2.37% for
the year ended December 31, 1995 and 2.35% for the year ended December 31, 1996.
(c) A contingent deferred sales charge is not reflected in total returns calculations. Periods
less than one year are not annualized.
(d) Computed on an annualized basis.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
December 31, 1996
1. The Fund is a series of New England Funds Trust II, a Massachusetts
business trust (the "Trust"), and is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as an open-end management investment
company. The Declaration of Trust permits the Trustees to issue an unlimited
number of shares of the Trust in multiple series (each series of shares a
"Fund").
The Fund offers both Class A and Class B shares. The Fund commenced its public
offering of Class B shares on September 20, 1993. Class A shares are sold with
a maximum front end sales charge of 4.50%. Class B shares do not pay a front
end sales charge, but pay a higher ongoing distribution fee than Class A
shares for eight years (at which point they automatically convert to Class A
shares), and are subject to a contingent deferred sales charge if those shares
are redeemed within five years of purchase. Expenses of the Fund are borne
pro-rata by the holders of both classes of shares, except that each class
bears expenses unique to that class (including the Rule 12b-1 service and
distribution fees applicable to such class), and votes as a class only with
respect to its own Rule 12b-1 Plan. Shares of each class would receive their
pro-rata share of the net assets of the Fund, if the Fund were liquidated. In
addition, the Trustees approve separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
A. SECURITY VALUATION. The Fund's investment subadviser Loomis Sayles and
Co., L.P. ("Loomis Sayles"), under the supervision of the Fund's trustees,
determines the value of the Fund's portfolio of securities, using valuations
provided by a pricing service selected by the Fund's subadviser and other
information with respect to transactions in securities, including quotations
from securities dealers. Valuations of securities and other assets owned by
the Fund for which market quotations are readily available are based on those
quotations. Short-term obligations that will mature in 60 days or less are
stated at amortized cost, which, when combined with accrued interest or
discount earned, approximates market value. All other securities and assets
are valued at their fair value as determined in good faith by the subadviser
under the supervision of the Fund's trustees.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security
transactions are accounted for on the trade date (the date the buy or sell is
executed). Dividend income is recorded on the ex-dividend date and interest
income is recorded on the accrual basis. Interest income is increased by the
accretion of discount. In determining net gain or loss on securities sold, the
cost of securities has been determined on the identified cost basis.
C. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains at least annually. Accordingly, no provision for federal income tax has
been made.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily
to shareholders of record at the time and are paid monthly.
The timing and characterization of certain income and capital gains
distributions are determined in accordance with federal tax regulations which
may differ from generally accepted accounting principles. These differences
primarily relate to interest on defaulted securities and expiration of capital
loss carryforwards. Permanent book and tax basis differences relating to
shareholder distributions will result in reclassification to paid in capital.
E. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery
of the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to
100% of the repurchase price. The Funds subadviser is responsible for
determining that the value of the collateral is at all times at least equal to
the repurchase price. Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for
the year ended December 31, 1996 were $76,448,057 and $68,141,635
respectively.
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. During the year
ended December 31, 1996 the Fund operated under two management fee contracts.
Prior to July 1, 1996 Back Bay Advisors, L.P. was the Funds investment
subadviser. Effective July 1, 1996 Loomis Sayles became the investment
subadviser.
Effective July 1, 1996 the Fund paid management fees to its investment
adviser, New England Funds Management, L.P. ("NEFM") at the annual rate of
0.70% of the first $200 million of the Fund's average daily net assets and
0.65% of such assets in excess of $200 million. NEFM pays the Fund's
investment subadviser, Loomis Sayles at the rate of 0.35% of the first $200
million of the Fund's average daily net assets and 0.30% of such assets in
excess of $200 million of the Fund's average daily net assets. Prior to July
1, 1996 the Fund paid management fees to its investment adviser, NEFM at the
annual rate of 0.75% of the Fund's average daily net assets. NEFM paid the
Fund's investment subadviser, Back Bay Advisors at the rate of 0.375% of the
Fund's average daily net assets.
Certain officers and directors of NEFM are also officers or trustees of the
Fund. NEFM, Loomis Sayles and Back Bay Advisors are wholly owned subsidiaries
of New England Investment Companies, L.P. ("NEIC"), which is a subsidiary of
Metropolitan Life Insurance Company ("MetLife"). Fees earned by NEFM, Back Bay
Advisors and Loomis Sayles under the management agreements in effect during
the year ended December 31, 1996 are as follows:
FEES EARNED(a)
$191,733 New England Funds Management, L.P.
$94,987 Back Bay Advisors, L.P.
$96,744 Loomis, Sayles & Company, L.P.
(a) Before reduction pursuant to voluntary expense limitations. See note 4.
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds L.P. ("New
England Funds"), the Fund's distributor, is a wholly owned subsidiary of NEIC
and performs certain accounting and administrative services for the Fund. The
Fund reimburses New England Funds for all or part of New England Funds'
expenses of providing these services which include the following: (i) expenses
for personnel performing bookkeeping, accounting, internal auditing and
financial reporting functions and related clerical functions relating to the
Fund, (ii) expenses for services required in connection with the preparation
of registration statements and prospectuses, shareholder reports and notices,
proxy solicitation material furnished to shareholders of the Fund or
regulatory authorities and reports and questionnaires for SEC compliance, and
(iii) registration, filing and other fees in connection with requirements of
regulatory authorities. For the year ended December 31, 1996 these expenses
amounted to $21,859 and are shown separately in the financial statements as
accounting and administrative.
C. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act,
the Trust has adopted Service and Distribution Plans relating to the Funds
Class A and Class B shares (the "Plans").
Under the Plans, the Fund pays New England Funds a monthly service fee at the
annual rate of up to 0.25% of the average daily net assets attributable to the
Fund's Class A shares and Class B shares, as compensation for services
provided and expenses (including certain payments to securities dealers, who
may be affiliated with New England Funds) incurred by New England Funds in
providing personal services to investors in Class A and Class B shares and/or
the maintenance of shareholder accounts. For the year ended December 31, 1996,
the Fund paid New England Funds $98,788 and $33,664 in service fees under the
Class A and B Plans respectively.
Also under the Plans, the Fund paid New England Funds monthly distribution
fees, at the annual rate of up to 0.10% of the average daily net assets
attributable to the Fund's Class A shares, up until June 30, 1996, and up to
0.75% of the average daily net assets attributable to the Fund's Class B
shares, as compensation for services provided and expenses (including certain
payments to securities dealers, who may be affiliated with New England Funds)
incurred by New England Funds in connection with the marketing or sale of
Class A and Class B shares, respectively. For the period ended June 30, 1996
the Fund paid New England Funds $19,258 in distribution fees for Class A
shares. For the year ended December 31, 1996, the Fund paid New England Funds
$100,993 in distribution fees under the Class B Plan.
Commissions (including contingent deferred sales charges) on Fund shares paid
to New England Funds by investors in shares of the Fund during the year ended
December 31, 1996 amounted to $216,832.
D. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder
servicing agent to the Fund. For the year ended December 31, 1996, the Fund
paid New England Funds $68,519 as compensation for its services in that
capacity.
E. TRUSTEES FEES AND EXPENSES. The Fund does not pay any compensation
directly to its officers or trustees who are directors, officers or employees
of NEFM, New England Funds, NEIC or their affiliates, other than registered
investment companies. Each other trustee is compensated by the Fund as
follows:
Annual Retainer $734
Meeting Fee $114/meeting
Committee Meeting Fee $68/meeting
Committee Chairman Retainer $ 23/year
A deferred compensation plan is available to the trustees on a voluntary
basis. Each participating trustee will receive an amount equal to the value
that such deferred compensation would have had, had it been invested in the
Fund on the normal payment date.
4. EXPENSE LIMITATIONS. Effective July 1, 1996 NEFM and Loomis Sayles
voluntarily reduced management fees to limit expenses to 1.40% of the Fund's
Class A average daily net assets and 2.15% of the Funds Class B average daily
net assets. In connection with the new subadvisery arrangements, Loomis Sayles
has agreed to waive 50% of the subadvisory fees payable to Loomis Sayles by
NEFM until June 30, 1997. Prior to July 1, 1996 Fund, Back Bay Advisors, and
NEFM voluntarily agreed to reduce management fees and, if necessary, to assume
expenses of the Fund in order to limit the Fund's expenses to an annual rate
of 1.60% of Class A average daily net assets and 2.25% of Class B average
daily net assets. From May 18, 1989 through September 30, 1993 expenses were
voluntarily limited to 1.50% of the Fund's average daily net assets. As a
result of the Fund's expenses exceeding the foregoing expense limitations
during the year ended December 31, 1996, Back Bay Advisors reduced its
subadvisery fee of $94,987 by $18,518, Loomis Sayles reduced it's subadvisery
fee of $96,744 by $48,636 and NEFM reduced it's advisory fee of $191,733 by
$15,132.
5. CONCENTRATION OF CREDIT; LOWER RATED SECURITIES. The Fund invests in
securities offering high current income which generally will be rated below
investment grade by recognized rating agencies. Certain of these lower rated
securities are regarded as predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligations and generally involve more credit risk than securities in the
higher rating categories. In addition, the trading market for lower rated
securities may be less liquid than the market for higher-rated securities.
6. CAPITAL SHARES. At December 31, 1996 there was an unlimited number of
shares of beneficial interest authorized, divided into two classes, Class A
and Class B capital stock. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------------- --------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- -------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold .......................... 1,182,928 $10,739,791 1,180,703 $10,845,790
Shares issued in connection with the
reinvestment of:
Distributions from net investment
income ............................. 289,825 2,629,615 271,485 2,481,709
--------- ----------- --------- -----------
1,472,753 13,369,406 1,452,188 13,327,499
Shares repurchased ................... (901,955) (8,189,417) (1,246,613) (11,384,029)
--------- ----------- --------- -----------
Net increase ......................... 570,798 $ 5,179,989 205,575 $ 1,943,470
--------- ----------- --------- -----------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------------- --------------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- --------- ----------- --------- -----------
Shares sold .......................... 690,304 $ 6,247,681 918,809 $ 8,381,978
Shares issued in connection with the reinvestment of:
Distributions from net investment
income ............................. 31,651 286,885 45,192 413,258
--------- ----------- --------- -----------
721,955 6,534,566 964,001 8,795,236
Shares repurchased ................... (127,062) (1,155,299) (261,493) (2,387,050)
--------- ----------- --------- -----------
Net increase ......................... 594,893 $ 5,379,267 702,508 $ 6,408,186
--------- ----------- --------- -----------
Increase derived from capital shares
transactions ....................... 1,165,691 $10,559,256 908,083 $ 8,351,656
========= =========== ========= ===========
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Board of Trustees of New England Funds Trust II and the Shareholders of
the NEW ENGLAND HIGH INCOME FUND
We have audited the accompanying statement of assets and liabilities,
including the schedule of portfolio investments, of New England High Income
Fund as of December 31, 1996, and the related statement of operations for the
year then ended, and the statements of changes in net assets for each of the
two years in the period then ended, and financial highlights for each of the
periods indicated herein. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1996, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
New England High Income Fund as of December 31, 1996 the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each
of the periods indicated herein, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 10, 1997
<PAGE>
--------------
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Where The Best Minds Meet(TM) PAID
BROCKTON, MA
PERMIT NO. 770
--------------
---------------------
399 Boylston Street
Boston, Massachusetts
02116
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QUALITY QUALITY
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1995 1996
- --------------------- ---------------------
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- --------------------- ---------------------
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